Vol 2, No 5
7 February 2000
B O O K R E V I E W:
Capitalism with a Comrade's Face: Studies in the Postcommunist Transition
Roman Frydman, Kenneth Murphy & Andrzej Rapaczynski.
Budapest: CEU Press, 1998. 389 pp.
Michael Kopanic Jr
As the title suggests, and as most astute observers quickly learned, the overthrow of Communism did not mean the end of Communist habits. A little more than ten years after the fall of the Berlin Wall, it is most appropriate to review such a book.
Capitalism and the free market have taken on a different appearance in the post-Communist countries that once belonged to the Soviet bloc. To be sure, the private sector now predominates the economies of these states, but the new owners look and behave very differently than their counterparts in the West.
The managers and former party bosses who once ruled the Communist states have entrenched themselves in the new system, a system which embodies a bizarre mixture of capitalist and socialist characteristics. As the authors point out in the preface, "a clean revolutionary break with the past is almost never possible." Vestiges of the past continue to linger and will do so for years to come, until a new generation strips itself of its societies' legacies. Even those reformers with the best of intentions cannot eradicate what is culturally pervasive.
While inheritances from the Communist past are partially responsible for the unsmooth transition, we should also keep in mind that the past goes far beyond the era of Communist past. Many of these countries carry a legacy of imperial rule, a bloated bureaucracy, nepotism, and national enmities which precede the First and Second World Wars. If anything, Communism acted as a catalyst in perpetuating some of the worst aspects of pre-Communist rule.
How do the authors account for the dominance of the old elite despite the overthrow of Communism? They argue and prove with empirical examples that genuine privatization most often never occurred because the state retained a controlling interest in many of the largest firms in all these states. The very fact of state involvement ensured that political interests would often win out over economic efficiency. Virtually all political leaders paid lip service to promoting privatization, including Belarus' unpredictable Alexander Lukashenko. But the state has stuck its nose into business and skewed the reform process to the extent that observers have termed the new "free market" to be a form of crony capitalism.
In two case studies, the authors lumped Croatia and Slovakia together because of parallel methods of corruption. In both countries, Slovak Prime Minister Vladimír Mečiar and Croatian President Franjo Tuđman changed laws to their own benefit and used privatization to reward their own cronies. With Mečiar's electoral defeat in September 1998 (which occurred after this book's publication), Slovakia under Prime Minister Mikuláš Dzurinda has embarked on a course to clean up many of these blatant abuses. Gaining the approval of the West, Slovakia has managed to gain admission to EU entry talks, but the culture of corruption which pervades Slovak society will take years to squelch. A recent survey shows that an overwhelming majority of the populace still believes corruption to be as pervasive as it was under Mečiar.
In the case of Croatia, the authors attack the West's acquiescence at authoritarian trends under the former Tuđman regime. Such behavior constitutes a double standard, for what receives sharp criticism in the case of Serbia is more often ignored in Croatia. The authors contend that Western leaders erroneously concluded that democracy is a dangerous phenomenon in the former Yugoslav republics. In reality, they argue, democratic politics have more often tended to "diffuse nationalist fervor" (p. 67). By rigging elections and treating any form of opposition with contempt, Tuđman and his HDZ movement. Agreeing with Professor Zakosek's assessment, they see Tuđman's style of politics as reeking of opportunism. The Croatian president concentrated a tremendous amount of power in the executive branch and a cowered judicial system sat by as the president manipulated the legislature into another one of his vehicles to maintain power.
Now with Tuđman's recent death in late 1999, Croatia will have a new chance to turn in a democratic direction. The recent defeat of Tuđman's party in the January 2000 elections show that his party's success may very well have depended upon his imposing personality.
Ironically, trade unions are among the biggest losers in these post-Communist societies, despite the fact that Solidarity in Poland played a key role in unraveling the former system. Most trade unions have concentrated on trying to preserve social benefits and jobs in the less profitable state-controlled industries. Union membership has plummetted as much as one-third many workers have found better paying jobs in the non-unionized private sector. Thus organized labor has become so defensive that it has shown little power to influence government policies. Unions have become preoccupied with protecting what property they have left from the socialist days.
The authors have clearly demonstrated that trade unions have remained on the defensive since the fall of Communism. However, trade unions were often not nearly as regressive as they would have us believe. Almost immediately after the Velvet Revolution, trade unions expanded their international contacts and eagerly sought to learn organizational methods and procedures from other unions in Europe and the United States. Union leaders realized that their enterprises were inefficient and that workers jobs would be lost. No doubt, unions sought to restrain the pain and endeavored to keep jobs. They felt a responsibility to their membership. Judging from my contacts with labor leaders in the Czech Republic and Slovakia in 1990 and 1995, many foresaw the long-term trends. They tried to mitigate the effects of restructuring by actively seeking to assist in the importation of Western technology and management skills.
The authors argue that like unions in the West, organized labor in the transition countries should concentrate on collective bargaining and protecting legally negotiated contracts. Of the two trade union models, the authors clearly favor the legal model in which individual unions negotiate their best deal. They do not prefer the tripartite model in which labor, the government and companies strike a deal on a national scale. But even if labor has been in a weakened position, participation in setting national agendas and wage policies has contributed to keeping the social peace and averted some otherwise preventable strikes.
The authors of this book adopt a free market approach and conclude that the economies will be run more efficiently and competitively if taxes are lowered, trade liberalized, and tax laws are clear and simple. Trade has clearly shifted westward and markets must remain as open as possible to ensure long-term growth. Lowering taxes also means cutting social spending, which they argue is far too expensive to maintain at current levels, and they reckon that social spending seldom reaches the poorest in these societies. Although such cuts might be politically suicidal, these are seen as necessary medicine to put the economies on track.
One burden from the Communist past continues to plague the budgets of transition countries -- the bloated pension funds. The authors make a plea the reform of pension funds and refer to the Slovenian and Czech models as providing direction. By allowing for competition from private pension funds, the government can be compelled to operate its own pension system more efficiently. They also argue that higher returns would draw more savings from within the region and help provide the capital required to invest in building infrastructure and other necessary expenditures.
When it comes to banking and capital markets in the region, the authors again assume a free market approach. They see over-regulation and a bloated bureaucracy as creating stumbling block, which hinder both domestic and foreign investment. Central banks, which are independent of political pressures, are assigned a paramount role in overseeing commercial banks and ensuring that inflation remains under control. Predictability, liquidity, and clear laws are needed, as well as an elimination of fraud. Company books need to be open and debt-ridden companies must face possible bankruptcy as punishment for poor decisions. Until these changes occur, stock and bond markets will continue to look more like casinos than mature capital markets.
Although the bottom had not yet fallen out in the Czech Republic, the authors correctly analyzed the principle weaknesses of Czech privatization: the close ties between banks and companies and the insider dealing that resulted. Eventually the corruption which this fostered was revealed and Václav Klaus' government came a tumbling down. The authors also saw that the high levels of state ownership in the banks bred potential trouble. Then in 1999, after this book was published, it was revealed that so many leading companies were losing money and had been taking generous state subsidies to stay solvent. Since the book was published, the Czech Communist Party has garnered over 20 percent in opinion polls as unemployment is quickly approaching double digit levels. Even the Czech free market fairy tale is unraveling.
In the final chapter, the authors conclude that taxes are simply too high in the transition countries. Comparing the new tax codes to the Frankenstein monster, a combination of new and dead codes, they point out that none of these laws channel moneys where they are needed most. For instance, in Ukraine actual costs for employers hiring someone are three times the wages paid (p. 368). The authors believe that the region can only maintain a worldwide competitive advantage if post-Communist governments adopt more realistic tax policies.
Although the book contains no conclusion, the general message is quite clear. The post-Communist transition has led to corruption and inefficiencies primarily because of past survivals. The Communist welfare state was a difficult burden to inherit and entitlements have drained state budgets to the limit. Communist culture has led to overly relying on the state. The authors clearly place their faith in a restructuring, which allows the invisible hand of the market to replace the state. They also believe that this will reinforce democracy as economic and political power would become more distributed among the general population.
While it is true that the state has often been the source of corruption in the region, it is also true that only the state can muster the power and resources necessary to minimize corruption and ensure a genuinely free economy. The state's duty is to oversee the general direction of the ship of transition rather than to chart its very specific course. But as we have recently seen in the case of the Czech Republic, too free a market, which lacks adequate regulations and established behavioral norms, can also lead to widespread abuses. Only the passage, acceptance, and enforcement of far-sighted laws will ensure that a genuine market economy evolves.
One cannot help but heap praises upon the authors of this lively book. Simply put, this is one of the best and most readable books available which explains why the post-Communist transition has been such a bumpy ride. Quoting everyone from Shakespeare to the economist Jeffrey Sachs, they have written it in an engaging and amusing style. The authors exhibit a breadth of knowledge which goes far beyond a narrow economic explanation of the transition.
In a work of this magnitude which covers so much in a comparative framework, one can only marvel at the extent of the authors' work. There were few if any noticeable errors. One minor spelling error stood out. The former opposition deputy of the Party of the Democratic Left in Slovakia, who is now the Minister of Finance, is Brigita Schmoegnerová (p. 56). One could also hope for more historical background information about some individuals, but this again is a minor detail considering the ambitious scope of the volume.
While one can praise the lively prose and analysis in the book, there is one glaring shortcoming. The authors failed to provide any sort of bibliography. Apart from notes connected with some of the excellent graphs based on statistics from the European Bank for Reconstruction and Development (EBRD), the World Bank, and other sources. References to other works are scattered throughout the text, but not available in one place for the reader to refer to.
The absence of footnotes is forgivable since the prose reads so well and most explanations are thorough and enlightening. In some cases they even go through the ABC's of economic background so that those without a PhD. in economics can make sense of the reading.
Michael Kopanic Jr, 5 February 2000
Order Capitalism with a Comrade's Face from
Copyright © 2000 - Central Europe Review and Internet servis, a.s.
All Rights Reserved